Banks asked to restructure MSME loans

Mumbai: Indian banks are heading for yet another round of loan restructuring. The beneficiaries this time are small- and medium-sized firms hit by the steep rise in interest rates and a slowing economy.

The government, which owns majority stakes in public banks, has asked the lenders to consider recasting the debt of micro, small and medium enterprises (MSMEs) chairmen and senior executives of at least four state-run banks said, citing a finance ministry directive last week. The banks have been asked to conduct closer monitoring of such accounts that are facing stress.

Analysts say another round of restructuring will exert further pressure on the profitability of banks, already facing rising bad loans or non-performing assets (NPAs), primarily from restructured loans.

“This will have an impact on banks, which are already suffering from interest rate rise and slower growth in economic activities. NPAs are a bigger concern,” said Santosh Singh, analyst with Espirito Santo Securities. “I think this makes bank (stocks) less attractive to investors.”

The development comes in the wake of many MSME units struggling to service loans as cash flows have dried up, bankers said. Many of these companies are on the verge of defaulting on advances.

“These companies are suffering from the current liquidity situation and the rise in interest rates and are largely unorganized,” said Bhaskar Sen, chairman and managing director of Kolkata-based United Bank of India. “Also, they generally do not get facilities such as corporate debt restructuring (CDR) like larger firms. They (government) want us to give some support to them, wherever it is necessary.”

CDR is a process under which banks recast loans to distressed borrowers with a repayment holiday, a reduction in interest rates or an extension of the repayment period. Banks have to set aside more money to provide for restructured loans.

In the aftermath of the 2008 global financial crisis, Indian banks restructured debt to assist crisis-ridden sectors.

According to data from rating agency Credit Analysis and Research Ltd, Indian banks have restructured at least 5% of their loans across sectors and 10-15% of such loans have turned bad for most banks.

Banks are recasting loans given to borrowers in the airline, real estate and microfinance sectors.

Reserve Bank of India (RBI) has increased its key rates 11 times since March 2010, forcing commercial banks to make money costlier for individuals and corporations by at least 2 percentage points.

As per the finance ministry directive, banks will examine MSME accounts that are facing difficulties and will provide relief either by extending the repayment period or giving fresh funds, the chief of a South India-based public bank said.

“There is need to look into particularly those accounts (under stress), giving timely help for them as they are vulnerable,” said the banker, who did not want to be named. Given the slowdown signs, “this sector needs close monitoring, especially on the asset quality side.”

Typically, small companies get loans from commercial banks at 12-14%, higher than the rate for most-favoured borrowers. The interest rate varies depending on the company and the nature of the loan. As of 20 May, Indian banks had loaned Rs 4.5 trillion to micro and small enterprises. Loans to these units grew 21.5% in 2010-11 from the previous year, when they grew at 17.9%, according to RBI data.

Most banks have seen their shares drop in the past six months due to a sharp rise in interest rates and the subsequent rise in bad loans.

State Bank of India (SBI), Central Bank of India, Vijaya Bank, Bank of India, Canara Bank and UCO Bank have seen their stocks plunge 30-36% since March, against a 17% fall in the Bankex index and a 14% drop in the Sensex.

Indian banks saw their NPAs growing the fastest in five years in the April-June quarter on account of adverse market conditions, Mint reported on 3 August. The growth in NPAs as a percentage of banks’ loan portfolio was almost at a five-year high in the June quarter, having risen 7.64% over the preceding three months to Rs 65,318 crore. It was the fastest rise in bad loans in a quarter since July-September 2006.

Net NPAs, after provisioning, in the April-June quarter grew 9.62% over the preceding quarter to Rs 27,311 crore.

A significant chunk of the bad loans for banks has come from restructured assets. For instance, 15% of the restructured loans (Rs 34,349 crore) of the country’s largest lender SBI were NPAs as of 31 March. Its nearest public sector competitor Punjab National Bank has at least 13% of such loans as NPAs.

Some analysts, however, believe restructuring is unlikely to be a major concern for banks. Instead, the process can even help them improve the quality of their loans. “If banks are restructuring, that may have some impact, but they do such an exercise only if they (are) confident in the business model of the firm and believe that the money will come back,” an analyst with a Mumbai-based brokerage said. He did not want to be named.